energy prices confront capm: implications for discount rates xiaomei (barbara) chen ncsu
TRANSCRIPT
![Page 1: Energy Prices Confront CAPM: Implications for Discount Rates Xiaomei (Barbara) Chen NCSU](https://reader036.vdocument.in/reader036/viewer/2022082610/56649da25503460f94a8ec9c/html5/thumbnails/1.jpg)
Energy Prices Confront CAPM: Implications for Discount Rates
Xiaomei (Barbara) Chen
NCSU
![Page 2: Energy Prices Confront CAPM: Implications for Discount Rates Xiaomei (Barbara) Chen NCSU](https://reader036.vdocument.in/reader036/viewer/2022082610/56649da25503460f94a8ec9c/html5/thumbnails/2.jpg)
What discount rate should be used for evaluating energy investments?
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Discount Rate
1. Rate of time preference
2. Economic growth
3. Risk premium
![Page 4: Energy Prices Confront CAPM: Implications for Discount Rates Xiaomei (Barbara) Chen NCSU](https://reader036.vdocument.in/reader036/viewer/2022082610/56649da25503460f94a8ec9c/html5/thumbnails/4.jpg)
1. CAPM (Capital Asset Pricing Model) helps explain commodity prices
◦Especially energy prices◦Risk premiums vary weekly
2. An unusually powerful test of CAPM
3. It matters for discounting energy investment
Three Points
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1. Energy futures return:2. Risk-free asset return
3. Risk Premium: 4. Commodity beta:
5. CAPM Predicted Risk Premium:
Some Notations
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Fitted Model: y = 0.17 + 1.69 x (0.09) (0.40)
Energy Futures
PropaneCrude Oil
GasolineHeating OilNatural Gas Coal
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Fitted Model: y = 0.17 + 1.12 x (0.12) (0.31)
Crude Oil Futures
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Crude Oil Futures
1985 1990 1995 2000 2005 2010
CAPM Predicted Risk Premium